The price of oil: It's bad news for the Middle East

Oil, now at $115 per barrel, could be headed for $150 or $80, writes West [AFP]

The oil markets are feverish again because of events in Syria, Egypt and Libya. There is talk of $150 per barrel and dire predictions about what that all means for the future.

But let's take all that with a pinch of salt. First, because markets are uncaring beasts and if past experience is anything to go by, have already factored in a strike in Syria. Nassim Nicholas Taleb relates in his latest book "Antifragile" how one of his mentors, "Fat Tony", made his fortune because he bet on oil prices actually dropping in 1991 when the US went to war against Saddam Hussein for the first time. And he was right. Prices had doubled from about $18 per barrel the previous summer, when Saddam invaded Kuwait, to nearly $40 by the time the fighting started. Once the missiles started to fly, the war had already been factored in and prices dropped.

In fact, there is a stronger case that, beyond a crisis-spike, oil prices might drop over the medium- to long-term because of deeper trends. Last year, the US increased crude output by the largest amount in recorded history because of shale oil production. North Dakota overtook Alaska and California as the second-highest oil-producing state. Demand in the rich countries has been static for over a decade, and although it is rising in Asia, India and China are now making serious inroads into cutting fossil fuel subsidies that have kept prices artificially low in the world's two largest growing economies.

Plus, they, as well as other developing countries, have learned the trick European governments developed after the oil crisis of 1973 - when the wholesale price of petrol and other fuel products look like they're going to go down after a geopolitical crisis, don't allow it! Tax the retail price to a new equilibrium and pick up a nice little earner virtually cost-free.

So market, schmarket. Oil, now at $115 per barrel, could be headed for $150, or for $80, or for $80 through a spike of $150. The roller-coaster continues. The TV business news segments continue to feature suited analysts earnestly spouting scenarios against a wall of screens and a sea of numbers.

The real news for the peoples of the Middle East is: It's bad news, whichever scenario plays out.

The autocracies of the region, scared by the Arab Spring, have locked themselves into a dependence on historically high prices just to achieve what economists call “fiscal break-even”, the oil price they need to be able to cover the budget.

The Effect of Arab Spring

The autocracies of the region, scared by the Arab Spring, have locked themselves into a dependence on historically high prices just to achieve what economists call "fiscal break-even", the oil price they need to be able to cover their budgets. Saudi Arabia famously threw $130bn at public services in 2011 to forestall unrest, and this year has a fiscal break-even of $98 per barrel, compared to just $74 three years ago. Previous efforts at developing the private sector have been quietly abandoned and the latest attempt at a social contract has involved hiring large numbers of young Saudis into civil service jobs of questionable value.

Continued high prices would keep that situation going, albeit precariously. Governments would stumble on with a mixture of repression and patronage networks, with poverty, discontent and extremism lurking at the edges.

Low prices on the other hand, would lay the fragility bare. As budgets plummet, services and jobs would be cut and unrest would rise - in conditions far less benign than 2011. An "Arab Spring 2.0" might harness rage without the hope of its predecessor, and with the spectre of sectarian divisions hanging in the air.

Which brings us to Saudi Arabia and Iran. There's been plenty of ink spilt on their regional rivalry and how it is playing out in multiple theatres from Afghanistan to the Levant. But as we consider Syria and the tragic rise of sectarian killing again in Iraq in the last few months, it is hard not to be drawn to the fact that for both countries ideological meddling in the conflicts of the region could have at least the serendipitous effect of raising the oil price - and easing the pressure at home.

The world has experienced two prolonged price crashes in recent history, in 1986 and 1998. Both times it was effective working agreement between Iran and Saudi Arabia which brought oil producers relief in the form of capping production to hold the price up.

This time, the governments of both countries are caught by the fiscal break-even. Both need to produce as much oil as they can themselves while maintaining a high global price, which can best be ensured by someone else, somewhere else, producing less. Iran's case is complicated by US sanctions, its need for foreign investment to bring production up in ageing fields, and the politicisation of the industry under the presidency of Mahmoud Ahmadinejad.

There are conspiracy theories upon conspiracy theories. Are Saudi money and Iranian intelligence facing each other down in Syria, Iraq and elsewhere because of the fragility of the oil markets? Or is Russia, whose fiscal break-even this year is $125? It seems unlikely. But you would have to be willfully naive to dismiss the fact that each regime is under stress to feed its patronage networks and each would benefit directly, and materially, from the failure of the other. Call it, then, an unconscious conspiracy of self-interest to promote conflict, in Syria, through Syria, and elsewhere.

Johnny West is founder of OpenOil, a Berlin-based consultancy in oil and other extractive industries. He has covered global energy markets since the early 1990s. He regularly contributes to The Guardian, Huffington Post and Petroleum Economist.

SOURCE: Al Jazeera

ABOUT THE AUTHOR

Johnny West is founder of OpenOil, a Berlin-based consultancy in oil and other extractive industries. He has covered global energy markets since the early 1990s. He regularly contributes to The Guardian, Huffington Post and Petroleum Economist.